Small business loans come in handy when a business is in urgent need of cash. These urgent needs include buying new tools, investing in new projects, etc. When you don’t have ready cash, a business loan can help. Every coin has two sides. Similarly, business loans have their own set of risks. These risks should be carefully studied before applying for a loan. You might lose an asset pledged as security. Your credit score might also be impacted if you default on your payments. Read on to determine whether a business loan will be a good step for your firm.
What is a Business Loan?
A business loan refers to the sum of money borrowed for growing or expanding the firm. The business loan has a single rate of interest and fixed payment terms. EMIs are deducted from your firm’s bank account. Loans for small businesses are money borrowed from a lender, such as a bank or an NBFC. It is a famous method of getting a business loan. There are fewer fees and low-interest rates available for small business loans. It has more flexible terms than other types of loans. If you need a loan like that, you can apply at a bank/NBFC. You can also rely on local lenders, such as credit unions.
Pros of Small Business Loans
There are many benefits to taking out a small business loan. Here are a few to consider:
- Assist in Business Growth
A business loan can help you grow your company by providing financial support. You don’t need to wait for your business to start reaping profits. With the help of business loans, you can put your dreams on paper and work on them.
- Keep Your Equity Intact
A small business loan allows you to get cash without taking on any investors. It enables you to control your business entirely and retain all the profits as your company grows.
Once you have the backing of an investor, he will be entitled to a portion of the profits as well. It will be continued until the business operates. A business loan is a liability until you pay it off.
- Ready Cash Assistance
There can be a shortage of cash in any business. When a business grows, it employs more people and buys new machines. In such times, business loans are quite helpful. You can apply for a loan and use it for operations. Repayment can be made as per the term agreed upon. There is no limitation on usage.
- No Restrictions on Use
If you apply for a loan from a local lender or bank, there is no limitation on usage. Whereas, if you ask for help from an investor, the investor will keep tabs on you. Investors may also restrict the use of the money. Unless the loan is for the firm’s machinery or real estate, you can use the business loan for whatever purpose you see fit.
- Preferred Over Other Options
Always weigh your options before taking a loan. A business loan can be a good option when compared to others. If your business has a market standing of more than five years, then opt for a business loan. OD facility, a firm’s credit card, and a personal loan can incur extra pressure on the pocket.
Cons of Small Business Loans
Every aspect of business has positives and negatives. You must study both of them before applying for a loan. The downsides of small business loans are as follows:
- Long Process of Loan Application
Lenders are giving a lump sum loan; they will require full-fledged paperwork. It results in a lengthy application process. While filling out the form, you will need to provide three to five years of tax details, books of accounts, and the mission and vision of the business.
- Default Payment Penalty
Banks/NBFCs ask for security to ensure the loan amount is secure. If, in any case, you fail to repay, then the security is used. Any asset used as security you might lose if unable to pay. Start-ups or new firms may have to use personal assets. These can be their homes, land, etc., which applicants might lose if they default on the payment.
- Good Credit Score
The central point noted by all lenders is a good credit score. For business loans, both business and individual, the score is seen. A good credit score determines the rate of interest. Usually, banks offer lower rates of interest than other lenders. It is also not easy to qualify for that minimum level. Your bad credit rating can put a burden on your pocket while you’re repaying.
- Strict Payment Terms
Unlike personal loans, payment terms aren’t relaxed for business loans. Loan amount, regular EMIs, and tenure are all prefixed. You have to be very careful before applying for such loans. Moreover, if your firm’s earnings are not stable, then EMIs can become a burden on your firm’s account.
- Priority to Well-known Firms
Lenders prefer to give business loans to companies that have longer repayment terms than start-ups. Give priority to well-established companies. If you are a new firm or startup, you will have a meager credit score. Banks and NBFCs hesitate to give loans to such firms. A good credit score is a major factor for any lender or bank. It makes your pathway to loan approval easy. New or infant firms find it challenging to get their loan approved.
As can be seen, there are both advantages and drawbacks to taking out a business loan, as with anything in life. However, if you’re wise, the right loan can give your business an edge and open up opportunities that otherwise wouldn’t be available.
It is critical to keep track of cash inflows and outflows. It helps you qualify for a small business loan if needed. When you have proper books of accounts, it shows the bank that you can manage your money well. It will further increase the chances of business loan approval. For more information about this small business loan, refer to Piramal Finance and explore their services.